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At a meeting of the Foueral Reserve Board with
The Advisory Council, held in the Assenbly Hall, Letropolit4n 4,ationa1 Bank Building, at 11:15 A.

on Tueeeay,

September 18, 1917..
Present:
Governor Harding, presiding, Yr. Warburg, Lr. Williams,
Lr. Delunc, hr. Hamlin, Mr. Allen, Assistant Oecretary, all
the members of the Advisory Council, and Secretary Grim.
President Fergan read to the meeting recommendations of the Coun:-il as fellows:




RECOVLENDATIONS OF THE
COUNCIL TO THE FEDERAL READVISORY
FEDERAL
SERVE BOARD.
September l, 1917.
TCPIC NO. 1.
The effect of the pending bond issue upon
our general financial situation, the policy that
the Federal reserve banks should pursue as to
reserves against deposits and note issues, discount rates.
Recommendation:
The temporary effect of the pending
Government bone issue upon the general financial
The
situation will be to einlocato Imrak dopct;its.
effort to be made to place the bonus with small investora will also to a considerable extent encroach
on savings uepouits. As this loan will cone on the
market at the season when, in connecticn with the
movement of crops, the greatest extenoien of bank
credit usually takes place, the banks, especially
at the centers, will need the assistance of the
Federal reserve banks in the shape of short loans
or redisccunts to a greater extent than they uid in
connection with the former issue.




As the money received by the government
for the bonds is redisbursed and returns to
the banks through the channels of Commerce
the financial situation will gradually adjust
itself to the net7 conditions created by the
flotation of such a large issue of bonds.
Bank credits will likely be still further
expanded, resulting in increased deposits and
loans.
In anticipation of these conditions the
Federal Reserve Bunks should pursue a policy
of conservation of their reserves against deposits and note issues. For this prupose,
while they should meet liberally the temporary
requirements of member banks for the prupose
of putting throug1, the governhient bond issue,
any undue expansion thereafter of a more or
less permanent nature should be curbed and controlled by the Federal Reserve Banks' discount
rites; for the protection of their reserves the
Federal Reserve Banks should raise their liscount rates whenever ocrAsion calls for such
action. Those banks should be kept in a strong
position not only in the interests of further
government financing but to prevent any undue
expansio,t of credit by their member banks
through the discount facilities afforded them.
TOPIC NO. 2
General discussion of the Foreign Exchange
situation:
To what extent can this country continue to
give credits to the naticns with which it is
associated in the war which normally send us
gold in settlement of trade balances due us, and
continue to ship gold to those nuetral nations
to which we may be indebted. What restrictions,
if any, are necessary upon our imports to offset
the embargoes on exports
Recommendation:
The Council has nothing on which
to base a definite opinion as to what extent

cos.
4




this country can continue shipments of rold to
to neutral countries while itself advancing
money to meet the requirements of-the countries
associated with us in the war. It seems to us
the shipments of gold are a pirt of the contribution which we are making to these countries,
being,part of our advances to them, for the
prosecution of the war. To what extent this can
be continued without unduly impairing our resources it is difficult to tell, but there is no
queAion that if such action tends to shorten
the war or to enable the associated nations to
win it, this country should not hesitate even to
impair its resources for the purpose of accomplishing that object. As the ver may be prolonged it
may be necessary in conjunctuon with the other
nations associated with us to endeavor to prevent
the arbitrage of exchenge as far as possible. In
that connecticn we have read with great interest
the report of the informal committee made to the
secretary of the Treasury on Septembdr 13, 2917,
and heartily approve of their suggestion°.
The Council views with great satisfaction the
increase of the gold resources of the Federal kleserve system and hopes that no steps will be omitted to increase and hasten the mobilization of the
gold of the country in the Federal Reserve Banks.
Grent discretion however, must be used in the methods
applied so as not to create alarm which may lend to
the hoarding of gold and its consequent demobilization. ':(3 note with satisfaction that the President
by proclamation has placed with your Board the control of gold exports. This will insure the handling
of such transactions with the discretion so necessary
to avoid public alarm.
TOPIC NC. 3.
Loss on Gold Abrasion

(Suggested by covernor Harding)

Recomendation:
Inasmuch as it is of paramount importance
that the gold now in circulation should be mobilized
in the Federal Reserve Banks which to some extent is
prevented because of the existeyce of light weight gold
in circulation we think the Feder-1 Reserve Eankn would
be justified in assuming the loss by abrasion on such
of this gold as is offered to them on deposit within
reasonable, specified time.




1

Additional Recommendation:
Merese, under section Four of R. R. 5901
(In the Senate of the United States, Calendar No. 121,
September 13, 1917, Fages 7 and 8) the following
language occurs:

•

"In any case of the issue of a series of convertible bonds, if a subsequent series of bonds (not including United States certificates of indeb(tedneso, war savings certificates, and other obligations maturing not
more than five years from the issue of such obligations,
respectively) bearing interest at a higher rate shall,
under the authcrity of this or any other Act, be issued
by the United States before the termination of the war
between the United States and the Imperial Cernan Government, then the holders of such convertible bonds shall
have the privilege, at the option of the several holders,
at any time within such period, after the public offering
of bonds of such subsequent series, and under such rules
and regulations as the Secretary of the Treasury shall
have prescribed, of converting their bonds, at par, into
bonds bearing such higher rate of interest at such price
not less than par as the Secretary of the Treasury shall
have prescribed,"
Resolved that this Couchl is of the opinion that
prior to the issue of these bonds it is essential that the
Secretary of the Treasury should state definitely all the
terms connected with them, including the price, at which
any future issues bearing a higher rate of interest will be
exchanged for them.
Additional Recorlendatien:
In f'ur opinion it may be necessary for the-succesful administration of the Food Administration Grain Corporation that the limit placed on loans by the by National b-nks
by Section 5200 U.S.R.S. should not apply to loans to this
Corportion. This Corporation being own2d by the United
States Government loans to it may properly be classified as
loans to the United Stites Government and therefore not subject
to the limitation of the Inv,. 1.7e would reconlend that an early
rullng to this effect should be made and promulgated by the
proper. authorities. If this is not possible under existing law
we recommend that the law should be amended.




General discussion ensued in which various ones
took part. Fleishhacker called attention to the f.-.ct
that one of the large mvings bnnks in District No. 12 had
lost 0,000,000 of its deposits through subscripticns to the
last Liberty Loan, and suggested this as a subject which might
veil have the consideration of the Board, perhaps with a view
to the recommendation of an amendment to the Federal Reserve
Act permitting loans by Federal Reserve banks to savings on approved securities.
Governor Harding directed attention to the fct that
such an amendment had been recommended by the Board in 1916 but
failed of approval by Congress and also referred to a conierence
which he had recently had with the State Superintendents of Banking for

Maine and Now Hampshire and the conditions in those Stator°
Mr. Ydlliamo suprested an amendment which would permit .9-cv-

inFs banks to cone into the Systen and obtain issues of Federal Weft'
notes against certain classes of their securities actually owned tlild
oiferild'
in the hadds of offering banks oix months prior to the drite of
r. 14ing expressed himself as opposed to having savings ball°
brought into the Reserve system on the ground that this would be a
opini°
source of weakness rather than of strength, and expresse6 the
'
that there was no particular danger in connection with the ceutLmp
loan but th-t there probably would be difficulty should other larcc
loans follow it.
help.

The savings banks, he said, must ultimately have

There was further discussion of the matter,
in connection with which Lir, Rue raise the question
as to th.; method through which a mutual savings bank
could subscribe to stock, and air. i4itche1l favored steps
tc enable Federal reserve banks to loan to savings banks
through member banks.

The situation of ;;Ltglish savings

bnks as the result of 1w4ns floateu by England was dis—
cus,qed by Ur. Forgan, -41c said that in the central west
he bolioved the silvirgs bank operations were so combined
with commercial bunking that there woulL, be a sufficient
amount of comn.ercial paper for redis-cunt to care for the
situation at present.

He said that in Chicago, with one

or t-!o exceptions, all of the savings banks had sufficient
cormLer ial paper for rediscount.
The liee

York situation was covered by

r. Vorgan,

who said that the savings bnks did not represent so large
a share of the financial structure that the commercial
,nks could not readily take care of them in connection
He thought this also true of Ne%. England,
and in reply to an inquiry from Lr. Warburg, :11() raised
question as to the willingness of commercial b-Anks to
e,re for the needs of savings bunks, Lr. Lorgan said it
soulu be necessary for them to do it, and that this was
conceded pretty generally.







C`
e

In summing up the diacusaion, Ccverror Hurding
exr,resseu the cpinien that

Lho

Federel reserve system

shodL‘ not be weakenee in any way, that savings banks
should have aid, and that ultimately the best source
from t;ihinh to obtain this aia

iikAB

through the Govern-

ment itself.
Each member of the Auvieory Council was asked
tc state ccnuitiche in his district for tee ir_ferzatien
of the Board, with special reference to (1) the relations
of clearing operations Lo Fa end reserve banks, (2) businees conditions, and (3) prospects for the sale of the new
ieuue of Liberty Benue:
r. Wing, Boeten. Boeton's banks are using the Federal
reserve c1earir4; system with sstisfacticn, and the tendency
is for bars to come into the System.

There should be i2.reat

care exercised in admitting smaller trust lompeenies, as it
is quite possible that they may be an element of weekness
rather than of strength.

The First Naticnal Bank, of which

Mr. Wing is President, fines it neceseary to carry a reeerve
with th. ieueral Reserve Bunk of approximately t1C,000,C00
but finus that it is carrying in addition a float of
(;15,C00,000 to nC,CCO,CCO representinr collections due
from ether brinks, to riu itself of which it has fcund no
auequate plan.




Large eavings banke are aecumulatinr

money, and there will probably be no trouble among
them by re. en of the next flotation of Government
bonds for they can ;et help from comiLercial bunks.
In his opinion New England

euld take only aboutore-

half the total ef its last subscription to Liberty
Bonds. ,his estimate Ur. Wing based upon the fellowing:
1.

Many corporations already hold substantial

purchases of bonds.
The corporation tax.
3.

The difficulty among corporations doing busi-

noes vdth the. Government in obtaining prompt payment,

toget or with the need for all of their capital in the
business in which they are engaged.
General business,

. Wing saia, was falling off,

but Government work is holding up tha situation.

Thure

is a considerable scarcity of labor.
organ, New York.

The Federal Reserve Bank.

is groing stronger every minute.

It ha u the cooperation

of member banks and others who want to enter the system.
The recent opinion of the Attorney General as 'Lc the application of the Clayton Act to State bank directors was
helpful.

The savings bank situation in New York is not

so large a part cf conditions as to mnke it vital during
the next loan.




Business is diminishing, people being

1 if

friLhtened by propcsed and possible legielation.
is a teneency not to lenu money.
going to be difficult.

There

The sule of bores is

Lary small holders have not yet

paiu for their previous purchases.

The real difficulty

is the uncertainty us tc taxes to be impcsed.

Fr. L:crgan

said New York, if it hau to do so, woul4robably take up
407 of the v.hole issue of bonds, say .1,500,C00,000, but
to ac this it Acule have to araw upon other parts cf the
country.

vr. Williams interjected the statement that

ret'onul bunks now held less than 1100,000,000 of the last
iscue of Liberty Bonus, aria in rely to a question 14r. Lcrgan stated that he thought the interest rate on the new
bonds should be 5% unu that they should be fully taxable.
jr. Watts, of St, Louis, sugrested thet this

7.U3

really

the perecnal preference of the Secretary of the Treasury,
but he

Wa3

bound to reccgnize the exemption granted to

state ;Ina municipal bones.
Continuing, ar. 1:organ saiu that Government loans
wculd have to ceme to a. 5% basis, and that there was
practically not a railroau in the country which was in
condition lc take any of the new issue of bonus because
is
of the fact that nctes were comine :.uo and that monov
bein{ taken away from them.




!tr. iud, Phila olphia, re[orteu that barks ir

delphiu were practically all ueinT, the Federal Reserve
Bank in one way or another in connection with their -learing operatiens.
member bzunks.

Some non-member banks operated through

In reply to an inquiry frol, 1.1r. Warburg,

Mr. hue st-Ated that in Philauelphia bunks were, however,
still settling clearing house bLaances in gold.

The

Stz.ff of the Federal hauerve Bank is totally inadequate
to hundle all the collections, and canno:, absorb ill the
float.

Businesa

is

letting up, except where manufacturers

are doing Government work.
borrowers.

These corporations are heavy

It will be difficult to arouse enthusiamm

for the nevi issue of bonds.
vert the fir3t

Issue

at the new rate and with the same con-

d privileges.

ditio

People thought they could con-

PailrouQs h:..ve a serious problem

before them anu ar -.) net in a condition to subscribe.
companies are w-11 loaned up.

Trust

Lr. Rue would not prognos-

ticate ho,:; much of the new issue of bonds the Philauelphia
district would take.
Calleu upon cut of order, Lr. Watts, St

Louia,

ed that now only five clearing house banks in St
wjre

not

members of the Fe oral Reserve System.

Louis
Not very

long ago a majority of all the local b.Inks viers TAOt
unu in t.Jelve months he thought ull th.3 rest woulu join.
This membership covers 807 of the banks holuing savings




aepoaits, aria in each case, the eommercial cperationa of
the banks hqving eaving3 deposits predominate.,

The St.

Lcuis dietrict will come fairly v1l up in its previous
allot:lent on the next Liberty Loan.

The farmers were nct

reached in the lust cemp ign but viculd be tieis time.

Lore

:ens will be sola to the exeerate investor.
Nr. Mitchell, 1.einneapolis, also e lieu upon cut cf
order, reported that clearing hcuse banks in the Twin
Cieiee were prectically all members of the syetee..
ness conuitions are normal.

Crops are good.

Busi-

In Minnesota

the wheat crop :;ill be seventy millioe bushels, in North
Dakota. 65,000,LUO bushels, but in ilontanu it will not be
sc good.

He believee the farmers would sell their wheat

at the price fixed by the Government and that the vclume
of bona ealea in the Northeest would be less than at the
previous offering unleau bunks subscribe heavily for their
own ac:-.ount .

The savings bunk situation is not a large

factor in -Lilo Nortiveest.

State banks heve not felt the

necessity for joining the system to any great extent thus
far.
r. Rowe, cf Cincinnati, said the use of acceptances
In that ;Astvict was gro%ing, aspecielly in the vicinity
CI Fieteburgh.

Depcsitors in the savings banks hake ac-

counts averaging

.s 200




to

OCO

each, and he did not think

they would be lar ely withdrawn on account of their
moderate size and the interest rate of 4 to 4%.

There

is an active demend for money, and he thcught issues of
Treasury certificates 'Lore being purchased by corporations in anticipation of heavy taxes to be levied upon




the corporations and for the payment of these taxes.
Mr. Norwood, Richmone, siu the banks in the smaller
places in that district were uein t- the Feueral l'eserve Eank
more an

more, but that ha

tion in Richmond.

was

not familiar with the situa-

Business is active, crops good, and

bonds will be sold to about the same extent

a3

before.

Mr. Lyerly, Chattanooga, Baia the Federal reserve
system waa growing in favor and strength and that the
savings bank situation in the Atlanta district could be
careu for.

There is an abundance of money, and it has

been necessary to guard against expension.

Seventy-five

per cent of the farmers have bettor crops thAn ever before.
There are 125,W, in three cantonments in the district,
bringing an expendi:ure of fro:e t6,000,C00 to 03,000,000
per month.

T f one-third the amount (f ecnLs sold in the

last campaign were taken by the 1.tieta district in the
nest campaign he thought it woulu have eore well.

Their

sale will be reteruee by the changed conditions as to taxaticn.

flr. Forn, Chi-, -0, saie that ell th
,;ere to

clearing .eouse

settlinF their entire balences by crafts

erawn cn the Feaeral Reserve Bunk, and all are delli_hted
with the resules.

There are Luray siril Stete bras which

wculd like to come in, but which hold that they cunrot effora to do sc bece.use they wculu be requ:red, as central
reserve city bunks, to carry l3

reserves.

The b.enks in

his district have fe'i. of the bones left, and are, therefore,
reedy for the next eumeeeign.

Business is very active,

the casind for money neevy, ane bunks are leteing large

amounts.
Li. Switney, Ku.neue City, reportee that; e strike,
now settled, had made havoc with business in Kanse,s City.
The Kars corn crop was vary lur6e.

The dietrict woula

ac the very best it could in contecticn with the new issue
of Liberty Bonc s.

it was h e
- gTered at the time of the last

issue by the fact that its bankn were
able money.

orrovirg consider-

There will be no eifficelty by reason of the

savings bank situation in the 1Cth aistrict.

Co4eiticns

. tire generally rood.
Swinney celled attenticn tc the teed for,subsialary silver coin and email bills.
Yr. Reccre, Dallaa, steted that crops were pretty
gooa e,na that thut eietriet would probably absorb as many




bends as before.
r. Fleishhacker, San Frurcio, said that the
clearing house bank situation Was working out ir SaY, Frsncisco and that the establishment of brrrhes cf th
haa been helpful.

t.'Ank

Businass conditions are quite satis-

factory, but th-$ situatio,, of the

virgs bunks in conn,,

tion with ';Jith6ra..als for pur huse of liberty bonds is not
good.

Labor is short, -Ana there is much labor trouble.

This district is much interested in the licensing of Eola
for shipment abroad, and vx•-. Fleishhacker expressed the
hope that the situation .ilould be h-Andled with care.
sale of the second issue of Liberty Eod
tirne

viil take were

(1 be mere difricult than tho wale of the first issue

because of the chane,ed conditions.
At 1:15, the meeting adjourn

APPROVED:




The

Chairman.

Secretary.